Greece likely to leave Eurozone and EU

The Greek central bank warned Wednesday that the country could crash out of the eurozone and even the European Union if it fails to reach a bailout deal with international creditors.

In one of the starkest warnings so far from a Greek institution, the Bank of Greece said: “Failure to reach an agreement would… mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and -– most likely -– from the European Union.”

Analysts have long warned that a default may set off a chain of events leading to a messy exit from the eurozone, a so-called Grexit, but not the country leaving the EU altogether.

Negotiations over the release of the last 7.2 billion euros ($8.1 billion) in rescue funds from Greece’s massive bailout from the International Monetary Fund, European Union and European Central Bank are deadlocked as payment deadlines loom.

Yet while the atmosphere between Greece and its creditors has deteriorated in recent days, the Bank of Greece insisted that the two sides were not that far apart, with only “little ground” between them before a deal could be struck.

Greece is due to make a 1.6 billion euro payment to the IMF at the end of the month, with another 6.7 billion euros due to the ECB in July and August — payments which Greek officials have said the government cannot afford.

With his options running out and his creditors saying his reform proposals are insufficient, Prime Minister Alexis Tsipras on Tuesday angrily accused creditors of trying to “humiliate” his Greece.

Elected on an anti-austerity platform in January, Tsipras has been reluctant to accept any further tax hikes and spending cuts.

European Commission head Jean-Claude Juncker hit back by accusing Tsipras of misleading his own voters.

“I think the debate in Greece and outside Greece would be easier if the Greek government would tell exactly what the Commission … are really proposing,” Juncker said.

– Deal is ‘historical imperative’ –

The Bank of Greece said that if the country left the 19-strong group of countries using the euro it would lead to a deep recession, dramatic declines in incomes and a spike in unemployment in the southern European nation.

“This is why the Bank of Greece firmly believes that striking an agreement with our partners is a historical imperative that we cannot afford to ignore,” it said.

“From all the evidence available so far, it seems that a compromise has been reached on the main conditions attached to this agreement and that little ground remains to be covered.”

In an increasingly tense situation, all eyes now turn to a meeting of the finance ministers of the 18-nation eurozone on Thursday.

Greek Prime Minister Alexis Tsipras addresses his MP’s and ministers at the parliament in Athens on June 16, 2015.

Before that, the head of the International Monetary Fund (IMF), Christine Lagarde gives a speech in Brussels on Wednesday in which she is likely to respond to Tsipras’ claims that creditors want to bring Greece to its knees.

When it comes to the terms of a potential new deal on the bailout, the Bank of Greece backed the government’s position that after years of austerity and the worsening of the economic situation Greece needs further time to pay back the billions it borrowed.

In particular it raised the politically-sensitive subject of relief on the country’s debt, which is now mostly held by Greece’s European partners as the bailout funds have been in loans.

The central bank called for the “reaffirmation and articulation in more specific terms of our partners’ willingness to provide debt relief…”

Greek leaders of all political colours have never forgotten the prospect, raised three years ago by eurozone ministers, that in return for reforms Greece could have some of its debts written off.

But it appears extremely unlikely that Greece’s eurozone partners will return to this idea any time soon as it would face likely fierce political opposition in a number of countries, especially Germany.

Despite writing off 107 billion euros of debt to private creditors as part of its second bailout in 2012, Greece’s debt load actually shot up to 177 percent of national output last year due to the fact its bailout has been in loans and that the recession wiped out a quarter of the economy.

“What we need today is a viable debt deal which will spare future generations burdens that we have no right to saddle them with,” said the central bank.

The Bank of Greece however called for structural reforms of the Greek economy, as has been demanded by the EU and IMF.